• ACE’s stock has a current market price of $52.25 a share and the company expec
ID: 2750128 • Letter: #
Question
• ACE’s stock has a current market price of $52.25 a share and the company expects to pay a dividend next year of $3 per share. • Dividends have been growing at a constant rate of 5% a year and are expected to continue that pattern. • The company also has a small amount of preferred stock outstanding that currently sells for $107 per share and pays an 8% of par value ($100) dividend. • ACE also has one bond issue outstanding that has a 7% coupon rate and pays interest annually. • Those $1,000 par value bonds currently have 9 years remaining to maturity and are selling for $941 each. • The total market value of the company’s common stock is $45 million, preferred stock $6 million, and debt is $33 million. • ACE’s marginal tax rate is 15%.
What weights would you use for ACE's debt, common stock, and preferred stock?
Calculate ACE's after-tax cost of debt.
Calculate ACE's cost of preferred stock.
Calculate ACE's cost of common stock.
Explanation / Answer
ACE's after-tax cost of debt.:-
= 1000 * 7% ( 1 - 0.15) + ( 1000 - 941) / 9 * 100
( 1000 + 941) / 2
= 59.5 + 6.56 / 970.5 * 100
= 6.81 % (approx)
ACE's cost of preferred stock.:-
= Preferred dividend / Net proceeds * 100
= 100 * 8% / 107 * 100
= 8 / 107 * 100
= 7.48 % (approx)
ACE's cost of common stock:-
= 3 / 52.25 * 100 + 5
= 5.74 + 5
= 10.74 %
Sources Weight Common stock 45 0.54 Preferred stock 6 0.07 Debt 33 0.39 Total 84 1Related Questions
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